EGP flexing muscles against the USD: Is it sustainable?

The EGP, deemed one of the world’s top performers in 2019, has been steadily rising in gains this month, extending a year-long trend that saw it in late December break through EGP 16 per $1 for the first time since 2017

The Egyptian pound has been forecasted to further flex muscles against the USD in 2020, analysts have said, reversing a soaring exchange rate following the 2016 devaluation of the local bank notes; however, other experts are not making positive predictions, arguing that more efforts should be exerted to ensure that an inflow of foreign currency is sustainable.

The EGP, deemed one of the world’s top performers in 2019, has been steadily rising in gains this month, extending a year-long trend that saw it in late December break through EGP 16 per $1 for the first time since 2017, after a devaluation the year before saw its value slashed by half.

The pound recorded EGP 15.76 per dollar on Thursday, CBE data showed, extending robust gains made since last week, supported by inflows of around $1.7 billion through 8-13 January.

Radwa El-Swaify, head of research at Pharos Securities Brokerage, told Ahram Online that Foreign Direct Investments (FDI), tourism, and remittances from Egyptian expats were the key sources of dollar inflows and therefore the local currency’s strength.

She expects the improving performance of the currency to continue throughout 2020, predicting the currency will strengthen by 5 percent this year.

“It’s 5 percent throughout the year. The Egyptian pound will end the year at EGP 15 per $1,” she said.

Societe Generale is also expecting an appreciation by the EGP of around 3.7 percent by the end of 2020 to trade at EGP 15.35 per USD.

Egypt’s tourism industry, a vital pillar of the economy and a crucial source of hard currency, has seen revival since the government embarked on a plan to reform and modernise the sector in order to increase hard currency revenues following years of political and economic instability that severely hit the sector.

Tourism revenues were estimated at $12.6 billion in fiscal year 2018/2019, which the government boasts as the highest in the country's history. It rose to $4.194 billion in the first quarter of the current FY 2019/2020 fiscal year from $3.931 billion the year before, signalling continued gains.

Remittances from Egyptian expats have also seen a rise, reporting $4.4 billion in July and August 2019, from $4.2 billion in the corresponding period in 2018.

The vital source has been a key provider of inflows since 2016’s devaluation in a period which had seen tourism, foreign investment and exports suffer.

FDI inflows during the first quarter of 2019/2020, jumped to $2.353 billion from $1.415 billion in the compared period in 2018; however, excluding the oil sector, the FDI plunged in the third quarter of fiscal year 2018/2019; its lowest since 2014 as Egypt fell short of attracting new investments.

But just as some analysts remain positive in the forecasts, others have chosen to try to step away from expectations, and try to tackle upcoming challenges.

“It is very difficult to forecast. Any forecasts would be mere speculation. We don’t know why the USD dropped in value to this extent in front of the EGP. We don’t even know if the drop of the EGP in half of its value overnight against the USD was justifiable or not. Is the current trend a correction to a condition that wasn’t correct?” Amr Adly, political economy professor at the American University in Cairo (AUC), told Ahram Online.

Adly believes that "a lot of variables and an information gap" does not help in explaining what happened or forecasts especially on the short term.

However, he forecasted the EGP will continue appreciating in the coming days against the USD tied to a perpetuation of hard currency sources, like tourism, in its strong performance.

“Both external the borrowing and debt-to-GDP ratio dropped last year. This means that hard currency sources carried the burden of improving conditions,” he said, pointing at the necessity of increasing imports as one of the main medium-term factors for the exchange rate.

“The improved performance of the EGP against the USD means that imports should increase in coming quarters. However, this remains unclear, because we don’t have a foreign exchange rate in the literal sense due to restrictions imposed by the CBE with major banks to control currency transfers outside the economy or regulate letters of credit for imports,” he added.

An analyst who asked to remain anonymous because he was not authorised to speak to the media told Ahram Online that the current movements within the USD was mainly due to hot money entry into Egypt to benefit from high and fast yields and a low risk-return profile in the country’s treasury bills.

The bank slashed interest rates by a total of 450 basis points (bps) last year amid declining inflation rates that followed austerity measures in recent years.

“The inflows of foreign currency through banks and exchanging it to the Egyptian pound to purchase treasury bills leads to a high demand on the local currency and therefore provides an abundance in foreign currency between banks,” he explained.

But, just as hot money remains attractive for investors lured by high yields, it remains “very dangerous because of how quickly it can exit the market at the same pace it entered.”